Tuesday, August 16, 2011

The Great Recession - a Dose of Reality

As we blast through the remainder of 2011, the economic condition of both the U.S. and the world is seriously on everyone’s minds. Just today, the Marketplace Morning Report highlighted concerns that the global economy is not recovering (emphasis mine):

Jeremy HOBSON (Host): When you look at the number -- 0.1 percent growth, then you look at France, 0 percent growth, Japan, negative 1.3 percent, the U.S., 1.3 percent -- are we heading into a global recession here?

Simon TILFORD: I think in terms of the Western, developed industrial economies, we're in a depression, frankly. It's very hard to see where growth is going to come from over the next few years. Governments have tapped out, they can't borrow. Monetary policy is as loose as it can be, interest rates can't be cut any further. The bottom line is there's a massive amount of debt that needs to be addressed.

HOBSON: Well, how can we go from what economists called a global recovery, into, as you say, a depression?

TILFORD: I think all talk of recovery of the last 18 months has been exaggerated. Many developed economies still haven't recovered their pre-crisis levels of economic activity. The U.S. is marginally above its pre-crisis level; Germany is marginally above; France, the U.K., Italy, Japan, well short of pre-crisis levels of output.

It’s a stark view, and at odds with the mainstream line in the American media of late. Yet it seems to resonate will with the experiences of average Americans, and especially their intense interest in job creation and economic growth.

Of course in Washington, the Deficit and debt are still distracting America’s “leaders” from that job issue, especially the post deal finger pointing. Once S&P downgraded us from AAA to AA+, a lot of Republicans began to bandy about the notion that the downgrade was because the proposed spending cuts didn’t go far enough, nor did they have enough additional tax breaks included.

Sadly for the Republicans, S&P said no such thing the first time.

Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default,” Mukherji said.

“That a country even has such voices, albeit a minority, is something notable,” he added. “This kind of rhetoric is not common amongst AAA sovereigns.”

Called out on their behavior, Republican politicians began to try and roll back their message. Sadly, in the Internet age, nothing goes away, as this tracker points out. TPM documents 19 instances in the three months leading up to the debt “deal” where prominent Republicans publically dismissed the doom and gloom predictions oof just about everyone, all the while singing the ideas that SUPPLY Side solutions could solve a DEMAND Side problem.

How bad has the disconnect between the disease and cure gotten? First, consider that much of the federal deficit problem (which feeds the debt increase ) is really a tax cut problem in as much as keeping the Bush tax cuts on the books (which Republicans want) is the single biggest driver for the deficit for the next decade. Second, Second, add in the fact that businesses don’t need regulatory certainty, they need profit certainty – and the best way to increase profits is to slash costs/wages/workers while retaining productivity. Throw in a healthy dose of “Government can’t create jobs” either by paying people to do work or contracting for services (like highway repairs). Stir well. At the end, you end up with plans of action coming from the conservative side of the aisle that ignore revenues, destroy the social safety net, and significantly hobble both military readiness, and our ability to grow the economy.

All this could be avoided, however, if we do a few sensible things. We need to listen to Warren Buffet. One of the richest men in the world reports that his real annual tax burden is about 17%, far below the top marginal federal income tax rate of 35%. As he sees it, and I concur, the tax code is stacked with too many things he and his ultra rich friends can use to pay less taxes, while soaking his own employees with tax burdens of 20- 35%. If he’s willing to call an egg an egg, so should we be.

Monday, August 1, 2011

The Great Recession fuels a swing to the Right - the Debt Deal and what it means for Liberals

It will come as somewhat of a surprise to my regular readers that I’ve stayed silent on the debt ceiling crisis. Part of the reason has been my July schedule – two weeks of vacation, a week in the office, and then a professional trip to Alaska. The other part of the reason is that I long ago reached a conclusion that analyzing the sausage making is a waste of my time – having spent most of the last five years doing federal budget work I know all too well how much can change in a day.

But now a “deal” is out, and like Washington Post Columnist Matt Miller, I’m underwhelmed:

So this is what we’ve driven the global economy and America’s credit rating to the brink for?

This is why Republicans (who voted for the Paul Ryan plan that would add $5 trillion in red ink over the next decade) decided it was vital to not lift the debt ceiling to accommodate their own budget’s outsized debt?

This is the best the White House could salvage after inexplicably failing to insist that the debt ceiling be raised as part of December’s deal to extend the Bush tax cuts — which would have let the country avoid this unprecedented exercise in self-inflicted damage?

See, I’m one of those liberals who sit well to the Left of the President – who is a Centrist at best and a moderate Republican normally – and thinks we could have done better. I’ve written here and elsewhere before about how, at the gross analysis level, you can’t cut your way out of this debt cycle – you have to raise revenues as well. Yet the plan now going before the House and Senate (with less than stellar chances of passing IMHO) is all cuts.

Many in the media punditocracy will no doubt try to spin this as “the best a besieged president could do. Paul Krugman is not buying it:

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Glenn Greenwald isn’t buying it either, and he notes with a fairly strong factual basis that the deal reached is the deal Mr. Obama wants to reach:

It appears to be true that the President wanted tax revenues to be part of this deal. But it is absolutely false that he did not want these brutal budget cuts and was simply forced -- either by his own strategic "blunders" or the "weakness" of his office -- into accepting them. The evidence is overwhelming that Obama has long wanted exactly what he got: these severe domestic budget cuts and even ones well beyond these, including Social Security and Medicare, which he is likely to get with the Super-Committee created by this bill (as Robert Reich described the bill: "No tax increases on rich yet almost certain cuts in Med[icare] and Social Security . . . . Ds can no longer campaign on R's desire to Medicare and Soc Security, now that O has agreed it").

Last night, John Cole -- along with several others -- promoted this weak-helpless-President narrative by asking what Obama could possibly have done to secure a better outcome. Early this morning, I answered him by email, but as I see that this is the claim being pervasively used to explain Obama's acceptance of this deal -- he was forced into it by the Tea Party hostage-takers -- I'm reprinting that email I wrote here. For those who believe this narrative, please confront the evidence there; how anyone can claim in the face of all that evidence that the President was "forced" into making these cuts -- as opposed to having eagerly sought them -- is mystifying indeed. And, as I set forth there, there were ample steps he could have taken had he actually wanted leverage against the GOP; the very idea that negotiating steps so obvious to every progressive pundit somehow eluded the President and his vast army of advisers is absurd on its face.

As usual, Mr. Greenwald is correct in the larger context of his analysis, and that is one of my main (and saddest) beliefs about the current Administration. They were not outfoxed nor were they outsmarted – they got what they wanted, just as they did with “healthcare reform”, our horrific indefinite detention policy, extensions of the “Bush era” tax cuts, and host of other, Right of center policies.

What the President (and to a certain extent Congressional Republicans) ignore is that the Economy has both grown weaker over the last 4 or 5 decades, and that weakness is severly exacerbated by the trends of income inequality that have emerged. Simply put, as Wages at the Higher end of the Economy (80th% and up) have grown significantly since the early 1970’s, wages for all the percentiles below have grown so slowly as to remain flat. This chart shows it well. Add in the fact that tax rates have actually gone down slightly since 1965 as a percentage of GDP, and it’s no wonder the government has the huge debt problem it has.

It’s also no wonder that the problem of that debt CAN’T be solved with a policy that severely reduces spending (even with slashes to entitlements and Defense/security expenditures). Such slashing is doubly disingenuous because it ignores responsibility for fiscal actions taken since 2000. If Republicans were to start all their discussions of what to do with the debt by owning this series of decisions, I might respect them more, even when I disagree with them:

The bottom line, however is this – the President has the deal he wants, Congressional Republicans have the deal they want, truly liberal Democrats are left out in the cold, and the fiscal condition of America’s middle and lower class households is about to get worse. What’s the starting line for that continued decline?

· 58% of Americans have a job

· 56% of Americans are covered by Health Insurance

· The median yearly wage in the United States is $26,261

· The Average American household is carrying over $75,000 in debt, including their mortgage

· Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975

· American families are approximately 7.7 trillion dollars poorer than they were back in early 2007

· Approximately 21 percent of all children in the United States were living below the poverty line in 2010

· According to Newsweek, close to 20 percent of all American men between the ages of 25 and 54 do not have a job at the moment

And lest anyone think the legislation (If it passes , consider this regarding the legislative branch:

The biggest problem here is that Congress is completely incapable of binding itself over time. And everyone knows it. There’s a name for the problem — legislative entrenchment — and a line of Supreme Court cases supporting it. And there’s Blackstone before that. (More here, if you want. But the headline is misleading, as the only significant loophole to legislative entrenchment is that one Congress can compel another to pay off its debts — not, shall we say, helpful in this situation.)

What one Congress enacts, another Congress can repeal. Always. This problem is often brushed aside, but it makes a lot of policy proposals ultimately silly the longer you look at them. Al Gore’s Social Security lockbox is the most infamous example, but unless I’m missing something really big, this one bids fair to surpass it.

Surprisingly, however, there may well be Democratic resistance, and principled resistance at that:

At a press conference held by members of the House Out of Poverty Caucus Rep. John Conyers (D-Mich), the second most senior member of the U.S. House, was pointed in his criticism of the White House regarding jobs and cuts to Social Security the President put on the table last week. “We’ve got to educate the American people at the same time we educate the President of the United States. The Republicans, Speaker Boehner or Majority Leader Cantor did not call for Social Security cuts in the budget deal. The President of the United States called for that,” Conyers, who has served in the House since 1965, said. “My response to him is to mass thousands of people in front of the White House to protest this,” Conyers said strongly.